Mean variance analysis in modern portfolio theory entails the construction of an optimal portfolio where risk expressed as variance is weighed against the potential appreciation, so that the return is greatest at a fixed level of risk and vice versa. The variance is measured by the extent at which the numbers are spread out within the set while the expected return is a probability denoting the estimated return on capital invested in the security. A Capital market line often abbreviated as CML is a prime example of a mean variance analysis conferring an optimal combination of risk and return according to a CAPM, or Capital Asset Pricing Model. The CAPM requires investors to establish positions by borrowing or lending at a risk-free rate as it maximizes the return for a given level of risk.
The CAPM is essentially the line of convergence for the risk-free rate of return and tangency point within the efficient frontier of optimal portfolios that theoretically confer the highest expected rate of return for a defined level of risk or the lowest potential risk for a given rate of return. The tangency point is the optimal portfolio of risky assets, or market portfolio. Modern portfolio theory is designed to achieve the greatest expected rate of return for a given degree of variance risk or vice versa predicated on mean-variance analysis, and assumes all investors will select portfolios laying upon the CML as a basis of these conditions.
The following introductory video regarding Mean variance and CAPM by Garud Iyengar of Columbia University, demonstrates the application of mean variance analysis and the CAPM to a hypothetical portfolio with randomly generated variables: https://drive.google.com/file/d/1XAxLfH6mlgmWsx5U7JmM13i79m8-nAQF/view
The spreadsheet used in the lesson can be downloaded from here: https://drive.google.com/file/d/1ihwjuQiyrXev6koVfBcwo1ton8rWZbhB/view
Downloadable Reference: https://drive.google.com/file/d/1GQTx-WPRJiGmRCOGlvSSQ2ppVaDpsZbO/view
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